David Reevely: How bad are Ontario’s finances, really?

David Reevely, Ottawa Citizen05.08.2014

Net debt to GDP ratio, 2013-14Dennis Leung
/ Ottawa Citizen

Guy Annable, wearing a barrel to protest the Liberals, at the campaign office opening event for Ottawa South Liberal MPP John Fraser at 1652 Bank Street in Ottawa, Ontario, May 7, 2014. Ontario Premier and Leader of the Ontario Liberal Party Kathleen Wynne attended the event. John Fraser is running for re-election in the June 12th Ontario provincial electionGarth Gullekson
/ Ottawa Citizen

You might be troubled by the state of Ontario’s finances, but probably not as troubled as Guy Annable.

When prominent Liberals come to Ottawa, Annable goes to see them. He slips into a rain barrel that hangs from his shoulders by makeshift straps and he marches, waving the flags of Ontario and Greece. He did it by the Bytown Museum as a posse of Liberal MPPs touted their budget. When Kathleen Wynne arrived to open a campaign office Wednesday evening, a cordon of Liberals kept Annable up the Bank Street sidewalk so he and their leader wouldn’t be in the same frame.

“I wouldn’t mind the spending and the going into debt, if it were for a good reason,” he says.

But for him, and a lot of other conservative-minded voters, it’s a hard mathematical measure of a government that doesn’t know what it’s doing.

Ontario’s debt is $296 billion, half again as much as that of the next-most-indebted province, Quebec. Our government is due to run a deficit of $12.5 billion this fiscal year, according to the Liberals’ latest budget proposal, which they’re defending in the current election campaign. We are to pay $11 billion this year in interest alone.

Annable backs the Progressive Conservatives — even in civvies he wears a blue PC button. He delivers plumbing supplies on an early morning loop down to Brockville each day and listens to talk radio on the road, but he also spends a lot of time reading raw government documents. He can quote auditor general’s reports from memory. He was a Liberal till the federal sponsorship scandal stunned him into re-evaluating his politics.

“I’m not a whack job,” he says. “I’m not a lone wolf, I don’t do anything illegal.” He just puts on a barrel and protests. For him, Ontario’s indebtedness is a major symptom of a bigger problem: a government that isn’t run for the people, but for the people in charge of it. The ORNGE and eHealth and gas-plant scandals bother him. Dalton McGuinty’s cherished green-energy program above all, which has hiked hydro bills across the province, irks him. It’s not the dollar figure, it’s what the dollars represent.

“It just burns me,” he says. “So do I go on Facebook and bitch? No, I get out there.”

The truth is, Ontario’s hard financial figures are not in a crisis, not yet. Ontario has the most debt of any province but it also has the biggest economy. Yet, as Annable says, Ontario’s arrows are pointing in the wrong direction. The projected deficit for this year is bigger, not smaller, than the last.

The Liberals have a more complete financial plan than any of the other parties because they’ve been running the government. We’re comparing months’ worth of work by teams of experts to promises from the Progressive Conservatives and the New Democrats that they haven’t even finished making.

But it means we know that the Liberals intend to keep spending. They have a reason, they say: Six years after the last recession, Ontario’s economy is still wobbly. Governments everywhere, including the federal Conservatives, spent to combat the recession and Ontario needs to keep doing it. (The provincial Tories would cut taxes to juice economic growth, they say, but details so far are sparse.)

“The higher short-term deficits will allow the government to immediately strengthen the economy today and make the investments necessary to grow the economy for tomorrow,” Finance Minister Charles Sousa said in delivering his budget. Grants to businesses, new and renovated schools and hospitals, a massive transportation program — all that means a deeper budget deficit in 2014 than the Liberals projected last year, and borrowing more to keep the provincial government going.

The Progressive Conservatives say they’d do the opposite. The private economy is weighted down by a bloated government, their leader Tim Hudak argues. He’d lay off 100,000 people from the government payroll, including teachers, and cut every budget except health and justice. Ontario isn’t near the end of a temporary downturn, in his view, it’s suffering a malaise that won’t lift until the government gets out of the way.

Despite the Liberals’ spending plans, every year they’ve ended up with slightly better books than projected. In 2013 the province’s revenues were lower than they were supposed to be but its spending undershot the mark.

“You’ve got to give credit where credit’s due: there are five years in a row of beating their budget targets. If they hadn’t done that, their debt would have been even higher. But the debt is still high,” said Derek Burleton, TD’s deputy chief economist. “Debt-to-GDP is 50 per cent higher than it was six to seven years ago. So it’s still high and it still represents a longer-term vulnerability to the province.”

That’s what worries Annable, who envisions a time when interest rates go up, which makes carrying current debt more expensive, and a straitjacketed government has to start cutting. He worries about a sharp divide between private-sector workers and public-sector workers who haven’t yet felt the same pinch.

With the election campaign on, Burleton said this week, TD has a policy of not commenting in detail on parties’ proposals. As a rule, though, he said it’s a mistake to focus on any government’s annual deficit numbers. Those are based on revenues and operating costs: they don’t include borrowing for big capital projects. Those can haunt balance sheets for decades as the newly built roads and bridges deteriorate. You hope they make the economy more efficient and that makes it up.

“It affects your operating budget very slowly,” Burleton said. “You only have to write off the so-called ‘useful life’ in any given year.”

What matters more to economists, he said, is the total debt the province is carrying.

Conservatives point out that Ontario’s debt is bigger than California’s — and California is a notorious basket case. Provinces and states don’t do the same things so it’s not a perfect comparison, but the difference is in the raw numbers: California’s debt was $210 billion US at the end of its last fiscal year, $86 billion less than Ontario’s. Yet bond-rating agencies — Moody’s and Standard & Poor’s — both give Ontario better credit ratings than California.

California has self-imposed rules that limit its options: having to hold a statewide vote on most tax increases is a big one. Until another rule was repealed by referendum in 2010, the legislature needed a two-thirds vote just to pass a budget and hard divisions between Democrats and Republicans made a two-thirds vote practically impossible.

California faced huge cuts to basic state services like education not because it was bankrupt but because it pretty much had to pretend it was. Ontario doesn’t have that problem: its government has what the bond-raters call “fiscal control,” which means the government can raise taxes to pay its bills.

This is good news if you’re looking to lend Ontario money; it’s not necessarily great if you’re an Ontario taxpayer. The bills do eventually come due. If we ran $10-billion surpluses every year, which we’ve never done, paying off Ontario’s debt would still take 30 years.

Annable doesn’t intend to stick around for that. He’s moved around a lot over the years — Montreal, Toronto, Pittsburgh, all before Ottawa — and Alberta is on his horizon, he says. “Go west, young man,” he laughs.

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